Opinion
Case No. 02-13533 (AJG), 06 Civ. 1038 (DC).
July 24, 2006
VINSON ELKINS LLP. By: Steven M. Abramowitz, Esq. David R. Lurie, Esq. Debbie E. Green, Esq. New York, New York, and By: Spikes Kangerga, Esq. Austin, Texas, and BALCH BINGHAM LLP By: Ben H. Stone, Esq. Gulfport, Mississippi, and By: Jesse S. Vogtle, Jr., Esq. Birmingham, Alabama, For Appellants Mississippi Power Company and Southern Company Services, Incorporated.
WEIL, GOTSHAL MANGES LLP By: Alfredo R. Perez, Esq Stacy Nettleton, Esq. Houston, Texas, and New York, New York, For Appellee MCI, Inc.
MEMORANDUM DECISION
These are cross-appeals from an order of the United States Bankruptcy Court for the Southern District of New York (Arthur J. Gonzalez, Bankruptcy Judge) dated December 20, 2005 (the "Order"), granting in part and denying in part the motion of appellants Mississippi Power Company and its agent Southern Company Services, Incorporated (together, "MPC") to compel "cure" payments from appellee MCI, Inc. ("MCI") in connection with a contract for the installation and maintenance of fiber optic cable in Mississippi. The Order followed an oral decision rendered by Judge Gonzalez on December 6, 2005 (the "Decision"). For the reasons that follow, the Order is affirmed.
STATEMENT OF THE CASE
A. The FactsThe facts are largely undisputed and are as follows:
In 1991, MPC entered into an agreement (the "Agreement") with MCI for the construction of a fiber optic telecommunications cable (the "Cable") in southern Mississippi. For many years, MPC had held easements and rights-of-way to the properties through which the Cable was to be laid, which had been used for electrical lines. Under the Agreement, MCI paid for the construction and installation of the Cable, while MPC received title to it. MCI also agreed to reimburse MPC for certain maintenance costs. MCI received the right to use a portion of the excess capacity for its telecommunications business.
The provision at the heart of the dispute in this case appears in Article 4, which is entitled "Construction and Installation," in a subarticle entitled "Obligations of Southern." Paragraph 4.1(d) provides:
[MPC] shall be responsible, at MCI's expense, and with MCI's prior approval if the cost is in excess of one thousand dollars ($1,000) per parcel, for the acquisition of any easements, rights-of-way or other rights that may be required in order to permit (1) the installation, operation and maintenance of the Cable, (2) the use of the [MPC] Interest by [MPC], or (3) the use of the MCI Interest by MCI. MCI shall be responsible for determining whether the acquisition of such easements, rights-of-way or other rights are required; provided, however, that if [MPC] notifies MCI that, in [MPC]'s judgment, any such easements, rights of way or other rights should be acquired, and MCI elects not to acquire such right, MCI shall reimburse [MPC] for any and all damages, judgments, settlements, costs, expenses (including reasonable attorneys' fees) and liabilities incurred by [MPC] as the result of any claim, action or lawsuit of any kind arising from the failure to acquire such easement or right-of-way right. If the use of the power of eminent domain is necessary in order to acquire any such additional rights required for the MCI Interest, then any required condemnation action shall be brought by MCI at its expense and in its own behalf. This Subarticle 4.1(d) is not intended as an acknowledgment by either party that any such acquisition of additional rights is required, but only to allocate the responsibility for such acquisition if required.
(Agreement ¶ 4.1(d)).
The Cable was installed in or about 1993. MPC did not advise MCI that in its judgment any additional easements or rights-of-way should be obtained, and no effort was made to obtain any additional easements or rights-of-way.
In 1993, several Mississippi landowners sued MPC in federal court in a case entitled McDonald v. Mississippi Power Co., alleging that its agreement with a different telecommunications company for the use of a different cable violated the terms of their easements. While MCI had no interest in and did not use that cable, the principles at issue in McDonald were certainly relevant to the Agreement and MCI's rights thereunder.
The federal court dismissed the action on jurisdictional grounds. MPC then filed suit in state court against the landowners, seeking a declaration that its existing easements and rights-of-way could be used for a fiber optic cable. The landowners counterclaimed against MPC for trespass, nuisance, and unjust enrichment, alleging that the easements they had granted MPC did not contemplate the use of the easements for a fiber optic cable by third parties. MPC did not give MCI any notice of this litigation.
In 1997, a Mississippi chancery court ruled in favor of MPC, holding that the installation of the optic line and its use by a third party were permitted by the existing easements. In 1999, however, the Mississippi Supreme Court reversed in part, holding that although MPC had the right under the existing easements to install and use fiber optic telecommunications cables, it could lease excess capacity to third parties only for "services provided in connection with supplying electricity." McDonald v. Mississippi Power Co., 732 So. 2d 893, 897 (Miss. 1999). Hence, unless the third party's use of a cable was for "services provided in connection with supplying electricity," the use did not fall within the terms of the existing easements.
On October 26, 2000, MPC wrote to MCI to advise it of theMcDonald decision. MPC also wrote:
This is to notify MCI that, in . . . MPC's judgment, additional telecommunications easements and rights should also be obtained across properties on which MCI is using fiber optic telecommunication lines.
(MPC App. Ex. 2 at Ex. A). MPC invoked subarticle 4.1(d) and advised that MPC wanted to begin acquiring additional easements, and requested MCI's approval to the extent the easements cost more than $1,000 per parcel. (Id.). Although MPC had previously advised MCI of the Mississippi Supreme Court's decision inMcDonald orally, this October 26, 2000, letter was the first such notice in writing. (Id.). MPC wrote this letter after learning that several landowners were contemplating suing in connection with MCI's use of the Cable. (MPC Br. at 12).
Indeed, in June 2001, a number of Mississippi landowners sued MPC with respect to MCI's use of the Cable. Eventually, by mid-2002, some 200 such suits were brought.
On June 20, 2001, immediately after the first of these cases was filed, MPC sent a second letter to MCI, advising of the lawsuit and requesting that MCI reimburse MPC for its damages, settlements, costs, and expenses incurred as a result of the lawsuit. (MPC App. Ex. 2 at Ex. B).
The various lawsuits apparently are still pending, as the issue remains as to whether MCI's use of the Cable involves "services provided in connection with supplying electricity." MCI has not reimbursed MPC for any damages, settlements, costs or expenses, and, with one exception, it has not obtained any additional easements or rights-of-way. (See MPC Br. at 14). Even if MPC and MCI prevail in the lawsuits, MPC would continue to have a claim for its costs of defending the cases.
B. Proceedings in the Bankruptcy Court
In July 2002, WorldCom, Inc. and certain of its subsidiaries, including MCI, filed for relief under Chapter 11 of the Bankruptcy Code. See In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d 455, 460 (S.D.N.Y. 2005). MPC filed a claim seeking to recover amounts purportedly owed to it by MCI under the Agreement. In the meantime, MCI continued to use the Cable, without paying for the Cable's maintenance and operation and without reimbursing MPC for its costs and expenses in defending against the many lawsuits filed by landowners.
Eventually, MCI assumed the Agreement and the parties entered into a stipulation whereby they agreed, inter alia, to submit any disagreements as to any alleged defaults under the Agreement to the Bankruptcy Court for resolution. On January 11, 2005, MPC moved to compel MCI to make cure payments pursuant to § 365 of the Bankruptcy Code for MCI's alleged defaults under the Agreement. MPC sought four categories of payments (respectively, the First, Second, Third, and Fourth Categories):
1) $303,315.13 for maintenance costs related to the Cable;
2) $419,560.02 for costs associated with MPC's title research and acquisition of rights-of-way;
3) $685,523.12 for legal fees and costs that MPC claimed were incurred as a result of MCI's purported default; and
4) $81,713.97 in attorneys' fees and costs related to MPC's pursuit of cure payments. (See MCI Br. at 10; Decision at 5-6).
On December 6, 2005, Judge Gonzalez rendered the Decision, based on the documentary evidence and affidavits and without live witnesses. The Decision was issued orally, in proceedings conducted by telephone, with counsel for the parties appearing by telephone. Judge Gonzalez concluded that "[a]s MCI has not disputed its liability for either the First Category or the Second Category," MPC was entitled to cure payments for these categories. (Decision at 6).
As to the Third and Fourth Categories, Judge Gonzalez held that the indemnification provision contained two conditions that had to be met before MCI's duty to indemnify arose: first, MPC was required to notify MCI that it believed easements should be acquired, and second, MCI failed, after such notification, to acquire such easements. (Id. at 9). Judge Gonzalez observed:
MPC, as a local entity that owns the easements at issue, has greater access to the information necessary to manage the risk of legal action on behalf of easement holders. MCI then bargained to assume MPC's risk in return for access to that information. In this way, MCI and MPC are then both better able to manage the risks related to the easements. The "defense" that is analyzed relative to the timeliness of the notice therefore includes this bargained-for defense of preemption. Simply, MPC's notice may not prejudice MCI's ability to preempt the claims for which MPC seeks indemnification.
Similarly, MPC may not prejudice MCI's defense in action for which indemnification is sought. The indemnitor may, if it chooses, intervene and assume the defense for the indemnitee in any such action. The indemnitee may, therefore, clearly not unreasonably prejudice this defense through untimely notice of a demand for indemnification.
(Id. at 16-17).
Judge Gonzalez then found that the notice provided by MPC to MCI was untimely. He concluded, inter alia, that "MPC had already litigated and lost the primary issue bearing on [the] defenses, whether the easements used by MPC and MCI were sufficient, before it sought indemnification from MCI." (Id. at 18). He held that MPC's delay in waiting to notify MCI until after the McDonald litigation was concluded rendered its notice untimely. (Id. at 20).
The Bankruptcy Court issued the Order, granting the cure motion as to the First and Second Categories and denying it as to the Third and Fourth Categories. MCI did not at any time advise Judge Gonzalez that he was incorrect in stating that MCI had not disputed its obligations with respect to the First and Second Categories.
These appeals followed. I heard oral argument on July 19, 2006, and reserved decision.
DISCUSSION
A. Standard of Review
The parties agree that because the Bankruptcy Court rendered the Decision based on the application of legal principles to undisputed facts, the standard of review is de novo. (MPC Br. at 3; MCI Br. at 12-13). See, e.g., Hoblock v. Albany County Bd. of Elections, 422 F.3d 77, 93 (2d Cir. 2005); In re Enron Corp., 335 B.R. 22, 27 (S.D.N.Y. 2005).
B. The Merits 1. MPC's Appeal
MPC makes two principal arguments in support of its appeal. First, it contends that the Bankruptcy Court erred in concluding that the notice given by MPC was untimely because when the parties entered into the Agreement "every relevant authority . . . indicated that MPC's existing easements were adequate to allow for the construction and operation of the Cable and MCI's use thereof." (MPC Br. at 20-21). Hence, MPC argues, "the earliest possible time that MPC could have reached a good faith judgment that additional easements should be acquired was after the Mississippi Supreme Court's decision that called into question third party use of MPC's fiber optic line by another telecommunications company." (Id. at 22). MPC promptly provided notice, it asserts, after that decision. (Id.).
Second, MPC contends that, even assuming there was delay, MCI was not prejudiced "on account of receiving notice after the decision was rendered." (Id. at 30). MPC argues that MCI had no right to defend the McDonald case because that case involved a different fiber optic cable system and the Agreement gave MCI no such right in any event. (Id. at 31-34).
a. Delay
Under Alabama law, a condition precedent must "be performed before some right dependent thereon accrues, or some act dependent thereon is performed." Adcock v. Adams Homes, LLC, 906 So. 2d 924, 931 (Ala. 2005) (quoting Black's Law Dictionary 293 (6th ed. 1996) (emphasis omitted). Whether a contractual provision is a "condition precedent" depends "upon the intent of the parties, to be deduced from the whole instrument." Bank of Brewton, Inc. v. Int'l Fid. Ins. Co., 827 So. 2d 747, 752 (Ala. 2002). In indemnification contracts, reasonable notice of a claim is often a condition precedent to the obligation to indemnify.Cochrane Roofing Metal Co. v. Callahan, 472 So. 2d 1005, 1008 (Ala. 1985); see HealthSouth Rehab. Corp. v. Falcon Mgmt. Co., 799 So. 2d 177, 184 (Ala. 2001) (holding that lease provisions requiring lessor to provide notice of default and an opportunity to cure the default before seeking remedies for breach are conditions precedent). Moreover, notice must be timely, because "[t]he law implies an obligation on each party to a contract to allow the opposite party all reasonable opportunity to perform his undertaking." Cochrane Roofing, 472 So. 2d at 1007. As the Bankruptcy Court here recognized, timely notice is given to an indemnitor so that the indemnitor will have an opportunity to prepare a defense or otherwise protect its interests. (Decision at 13-14 (citing cases and other authorities)).
By its terms, the Agreement is controlled by Alabama law, and the parties agree that Alabama law applies. (Agreement art. 45; MPC Br. at 20; MCI Br. at 18-19; Decision at 6).
Here, MPC's obligation to give timely notice that additional easements were required was a condition precedent to MCI's duty to indemnify. MCI's duty to reimburse MPC for "any and all damages, judgments, settlements, costs, expenses (including reasonable attorneys' fees) and liabilities" arising from MCI's failure to acquire additional easements or rights-of-way arose "provided" that MPC notify MCI that, in its "judgment, any such easements, rights of way or other rights should be acquired, and MCI elects not to acquire such right." The parties must have contemplated that the determination of whether additional easements were required was to be made before the Cable was installed. As a matter of logic, the parties surely contemplated that MPC would advise MCI of any additional easements it believed should be acquired before MCI actually built the Cable on any particular landowner's property; in the event of such notice, MCI was obliged to acquire the additional easements. If MCI went ahead and built the Cable without obtaining the additional easements, then it would be obliged to indemnify MPC in the event it turned out that additional easements were required. It would make no sense that MCI's duty to indemnify could arise after the Cable was built if MPC only gave notice then that additional rights might be necessary, for at that point there would be little that MCI could do, after the fact. Indeed, subarticle 4.1(d) appears in the article on "Construction and Installation," under MPC's obligations.
MPC did not give MCI notice prior to construction of the Cable that it believed any additional easements were necessary. Accordingly, MCI built the Cable without acquiring any additional easements. It had no obligation to obtain any additional easements prior to building the Cable because MPC never gave it notice that any additional easements were required.
As for MPC's argument that when the parties entered into the Agreement, the law was seemingly clear that additional easements were not required, the simple answer is that the parties were wrong. More importantly, the parties clearly bargained for MPC to assume the risk of determining which additional easements would be necessary, because MPC, as the "local entity" that owned the easements in question with greater access to necessary information, was in a better position to make the judgment as to whether additional easements were required. (Decision at 15-16). Once MPC made this judgment — and gave notice to MCI — the risk shifted to MCI either to obtain the easements or, if it declined to do so, to bear the expense in the event it turned out that easements were necessary. Because MPC did not give notice, the risk did not shift to MCI.
Even assuming MPC was not required to give notice before the Cable was constructed and installed, it waited far too long to give notice. MPC did not give notice of its "judgment" that additional easements "should be acquired" until after the Supreme Court's decision in McDonald in January 1999, and indeed not in writing until October 2000, some seven years after the Cable was installed.
MPC had reason to give notice in 1993, when it was sued in theMcDonald case. Indeed, after the initial suit in federal court was dismissed, MPC commenced its own lawsuit against the landowners in state court. Surely, MPC must have had reason to believe then that an issue existed as to whether additional easements or rights-of-way were required, and surely it must have known then that MCI had an interest in the outcome of the McDonald case. Yet, MPC did not give notice — until some seven years later.
MPC also argues that it did not reach the "judgment" that additional easements should be purchased until after the Mississippi Supreme Court ruled. Even if that is so, it must bear the risk of its failure to reach that judgment sooner. Moreover, its delay in reaching that judgment, under all the circumstances, was not reasonable.
b. Prejudice
MPC's delay substantially prejudiced MCI. The delay defeated the purpose of the notice provision, as it left MCI in the position where there was little it could do to protect its interests. By the time MCI received notice, the Mississippi Supreme Court had already ruled on an issue that was controlling with respect to the Agreement and the Cable.
It is true, as MPC argues, that MCI had no ownership interest in the cable at issue in McDonald. MCI still could have tried to intervene, however, as the legal issues presented inMcDonald were precisely the issues that would be raised with respect to the Cable, and any final decision in McDonald would be controlling precedent as to MCI. (See Decision at 19). Even assuming it could not intervene, MCI still could have participated in the defense of the case and provided input in the litigation. Moreover, MCI could have made the decision early on — before the Supreme Court's decision — that it should purchase the easements. It undoubtedly could have paid a lower price than it would have had to pay after the Mississippi Supreme Court's adverse ruling in 1999. At a minimum, it would have been in a position to make its own judgment.
Even if MPC believed, prior to 1999, that it would ultimately prevail, it should have given notice to MCI. Its failure to do so resulted in substantial prejudice to MCI. Because MPC did not provide timely notice, the condition precedent was not met. I have considered MPC's remaining arguments in support of its appeal; they are rejected as well. The Bankruptcy Court's Order in this respect is affirmed.
2. MCI's Cross-Appeal
On its cross-appeal, MCI argues that the Bankruptcy Court erroneously awarded $419,560.02 in cure payments for the Second Category because its premise that this Category was not contested was incorrect. When it issued its oral decision, however, the Bankruptcy Court stated that MCI had not disputed its liability for the First or the Second Category. MCI counsel was participating in the telephone conference, but did not dispute or correct the statement. Nor did MCI thereafter file a motion for reargument or reconsideration to advise the Bankruptcy Court that it had proceeded based on an incorrect premise. Under these circumstances, I will not disturb the Bankruptcy Court's decision. This ruling is without prejudice to any motion that MCI may make in the Bankruptcy Court for relief, pursuant to Rule 60(b) or otherwise, based on mistake, inadvertence, or other grounds.
CONCLUSION
The Order is affirmed, in all respects. Costs to MCI.SO ORDERED.